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When rapper Psy's Gangnam Style video went viral, it was clear that there's more going on in Korea than smartphones and sedans. Traditionally the best way for investors to participate in the Korean growth story has been to buy companies that have built a big global profile, like Samsung (ticker: 005930.Korea) and Hyundai (005380.Korea). It could be a good time to look at the Hermit Kingdom's domestically focused consumer stocks.

Korea is the second-cheapest market in Asia, behind battered China. Korean stocks are selling at just over nine times next year's earnings, and analysts expect corporate profits to grow 12% to 14% in 2013. Part of the low multiple no doubt is due to the "Korea discount" that's widely blamed on its convoluted shareholding structures for companies linked to Korean chaebol, or business groups.

"Korean consumer stocks are now starting to look cheap," says Herald van der Linde, Asia strategist for HSBC in Hong Kong. "I think Korea will see a strong cyclical recovery at some point in 2013, and that's not yet reflected in stock prices," he says.

Banking stocks, an easy proxy for the country's consumer health, seem expensive, but there are other ways to play changes in the country. CLSA Asia Pacific Markets' Oliver Matthew is a big proponent of what he calls the "girl power" story in Korea. Companies focused on selling to young women are seeing higher sales and better margins, he notes, with cosmetic companies reporting double-digit sales and earnings growth. "A lot of younger Korean women are working but living with parents and, as such, have high disposable incomes," he says.

Sonia Kim, consumer analyst at Credit Suisse in Seoul, says, "Korean women are also getting married later and are better educated, so higher spending power allows them to invest more in themselves." Among the stocks catering to this group are Cosmax (44820.Korea), which makes cosmetics for
L'OrealOR.Fr -0.6169031462060457%L'Oreal S.A.France: ParisEUR161.1
-1-0.6169031462060457%
/Date(1425425777000-0600)/
Volume (Delayed 15m)
:
545506
P/E Ratio
19.454944675728747Market Cap
90975447212.9784
Dividend Yield
1.675977653631285% Rev. per Employee
290916More quote details and news »OR.FrinYour ValueYour ChangeShort position
(OR.France), and Korea Kolmar (24720.Korea). Cosmax profits are expected to grow 23% next year and the shares trade at about 18 times forward earnings; Kolmar is cheaper, with a forward multiple of 13, and its earnings could grow faster, at 27%.

Hong-Suk Na, of Macquarie Securities in Seoul, likes consumer staples like Nongshim (4370.Korea), an instant-noodle maker that's gaining share, and a dominant local casino operator, Kangwon Land (35250.Korea), which just doubled its capacity but is waiting for government approval for the expansion. "If they get a license after the presidential elections in December, I see their revenues growing 50%, and earnings up 40% next year, with another 30% to 40% growth in 2014." Says Na: "If they don't get the license, earnings would still grow 4% to 5% a year organically." He has a 33,000 won ($30.10) price target, or 37% upside for Kangwon Land, and a 320,000 won target for Nongshim, or 24% higher.

Of course, there's always the chance that some of these domestic successes become, like Psy and Gangnam, international brands. CLSA analyst Matthew notes that Korean cosmetics are becoming more popular abroad, particularly in Japan and China. The prime example so far is Amore Pacific (90430.Korea), which sells over 20% of its products in China. The company was early to include herbal ingredients like ginseng, ahead of bigger names like L'Oreal. The stock, however, has jumped about 30% in the past two months, giving it a hefty forward multiple of 22. The idea is to discover the next Amore Pacific.

Korean Woes

Renewed concerns about global growth sent Korea to its fifth loss in six weeks.